Capstone Energy+, Inc. Q1 FY2027 earnings call

• Corporate milestones: Capstone Energy+ officially launched its new broader market identity, began trading on NASDAQ under the ticker CEPL following a successful uplisting. The company has built a profitable, resilient business after two years of cost discipline and operational improvements, with expanded gross margins and positive operating cash flow even with a lower revenue base. - Technology development: Progress continues on four core technology initiatives: the 800-volt DC microturbine for AI data centers has been demonstrated to prospective customers and is being evaluated for broader distributed generation use cases; cold weather test protocols are being prepared for the 5 ppm combustion liner; the C250 engine program has started construction of a third test unit, with design improvements that will benefit both C250 and C200 platforms; the second heat recovery module prototype incorporating cost reductions and performance improvements is under construction. A broader cross-system efficiency initiative has also been launched. - Manufacturing and supply chain: Multiple small-scale manufacturing investments (vertical lift machines, in-house tube bending, in-house decal printing) have reduced costs, cut waste, improved productivity, and quadrupled on-floor megawatt production capacity while maintaining disciplined capacity expansion. The company can scale production further by adding shifts only as committed customer demand materializes, to avoid adding unneeded fixed costs. DFMA cost reduction initiatives have delivered significant results: one component (air bearing cartridge) saw a 57% cost reduction, while also eliminating sole-source supply chain risk. Management prioritizes hundreds of small continuous improvements rather than large transformative projects. - Data center market progress: The company has built growing awareness of its microturbine solution, which offers faster deployment than competing alternatives (only requiring a concrete pad, natural gas connection, and electrical connection, with no need for extensive auxiliary infrastructure or additional emissions abatement equipment) to deliver time-to-power and time-to-revenue benefits for data center operators. Commercial discussions are advancing to more meaningful stages, and management spends significant time pursuing data center opportunities. - Cost and financial discipline: The company maintains strict SG&A cost control, has delivered four consecutive quarters of positive net income and nine consecutive quarters of positive adjusted EBITDA, and prioritizes profitable growth over unprofitable volume or backlog expansion.

Total company revenue for Q1 FY2027 (ended June 30, 2026) was $24.9 million, down from $27.9 million in the prior year period. 1. Product and accessories: Revenue was $13 million, down from $15.7 million YoY, representing 52.2% of total Q1 revenue. Gross margin expanded to 31% from 8% YoY, driven by cost reduction initiatives and favorable mix from sales of previously rented systems. 2. Parts and service: Revenue increased 14% YoY to $9.7 million from $7.9 million, representing 39.0% of total Q1 revenue. Gross margin decreased to 41% from 53% YoY, due to higher warranty claims and higher-cost warranty part shipments, partially offset by distribution service contributions. 3. Rental: Revenue was $2.2 million, down from $4.2 million YoY, representing 8.8% of total Q1 revenue. Gross margin decreased to 36% from 52% YoY, due to lower fleet utilization amid oil price uncertainty.

Management maintained their core outlook for fiscal 2027, with no upward or downward revision to prior guidance. Key forward-looking priorities and expectations: - Q1 is historically a softer quarter, and after adjusting for one-time order impacts, product revenue grew year-over-year. Management expects the remaining three quarters of FY2027 to perform in line with expectations based on current commercial pipeline. - Management continues to target sustained margin expansion from ongoing product cost reduction and operational efficiency initiatives. - The company expects to convert its growing commercial pipeline (particularly for data center and commercial/industrial opportunities) into revenue, earnings, and cash flow over time, and will only pursue profitable growth, turning down unprofitable deals even to increase backlog. - Management is actively evaluating refinancing or repayment alternatives for the $25.3 million exit notes maturing in December 2026, and will update investors once a definitive plan is finalized.

• Lower product shipment volume and reduced rental fleet utilization (driven by oil price uncertainty and geopolitical impacts on the oil and gas end market) reduced year-over-year total revenue. - Commercial/industrial project pipeline is growing, but project closings are taking longer than expected due to slower Capital expenditure release and longer timelines for energy-as-a-service power purchase agreement transactions. - The $25.3 million exit notes mature in December 2026, and there is uncertainty around the final outcome of refinancing/repayment efforts. - Warranty claims have increased parts and service costs, putting downward pressure on parts and service gross margins. - The company competes against much larger, more established industry incumbents in the power generation market. - Data center market entry has taken longer than planned, and no customer agreements have been finalized to date.

Q: Can you share commercial momentum trends by end market and visibility for the remainder of FY2027? / A: Oil and gas end markets have slowed, with rental units coming off rent faster than they returned due to geopolitical uncertainty. Commercial and industrial pipeline is growing, but deal closing is slower than expected due to delayed CapEx release and longer timelines for increasingly popular power purchase agreement energy-as-a-service structures. After adjusting for large one-time orders in the prior year, product revenue grew in Q1, and management expects remaining quarters to meet expectations based on current pipeline.

Q: Can you share any updates on data center pipeline or conversation quality? / A: Management spends over 30% of weekly time on data center opportunities, and discussions have advanced to more meaningful phases. When customers complete total cost of ownership models, Capstone's pricing and solution are competitive. It is only a matter of time before the first data center deals are closed, and cost reduction initiatives have prepared the business to support this growth.

Q: Is the $25 million Goldman note expected to be extended? / A: Management does not plan to extend the note, and is actively working on a commercial banking refinancing option to repay or replace it before maturity.

Q: Has the 6.6-megawatt North Carolina swine waste-to-energy project demonstrated value, and is this a large addressable market? / A: The project aligns with Capstone's focus on circular economy renewable energy, converting livestock waste streams (which cause odor and groundwater contamination issues) into usable power. Capstone microturbines' ability to operate across a wide load range makes them ideal for this application, and the company views waste-to-energy as a meaningful growing market to continue pursuing.